Measuring the Value of LP Fund-Selection Skill : A Fair Comparison Framework

An LP must make many choices when investing in private markets: How to invest uncalled capital? How many funds to invest in each vintage? How to pace commitments? Is there a class of funds where skill matters more than others? We answer these questions using our fair comparison framework, which also allows a comparison across public and private assets.We find that a careful selection of choices such as the default investment for uncalled and uncommitted capital, the level of diversification across both funds and vintages, and of course the choice of private market strategy (e.g., buyout, venture, or real estate) has a meaningful impact on the risk-adjusted returns of a private asset portfolio.While fund-selection skill improved private asset performance, the benefit from skill was uneven across the different private markets. Somewhat counterintuitively, venture funds’ (especially early stage) risk-adjusted performance may not improve the most from LP fund-selection skill. While mean returns improved, volatility persisted. Based on a fair comparison, we find that LPs may benefit the most from the skillful identification of good performing mezzanine and real estate funds. We also find that venture investments had the lowest risk-adjusted returns because of their high underlying risk, but they may still offer a better investment opportunity than public markets (manager alpha included), with or without skill